By Neuberger Berman Fixed Income Investment Strategy Committee
The unexpected victory of Donald Trump and his pro-growth platform in late 2016 inspired an abrupt shift in investor sentiment and sparked a sharp rally across risk assets. One hundred days into the Trump administration, however, it’s clear that any anticipated policy tailwinds will take time to develop and that economic growth is likely to remain uninspiring in 2017 as a result. On the bright side, the stubborn persistence of lackluster growth over the past eight years may have helped prevent excesses from developing in pockets of the U.S. economy and markets, forestalling a turn in the domestic business cycle and setting the stage for a synchronized global recovery.
According to the National Bureau of Economic Research, the United States has gone through 11 business cycles since 1945, the average trough-to-peak duration of which was about 58 months. The current cycle, which began in June 2009, already has persisted for 95 months. While business cycles aren’t governed by the calendar, the length of the ongoing expansion has inspired much speculation about where we are in it and when it may come to an end.
Perhaps most noteworthy about the current cycle is the sluggish pace of recovery and expansion; U.S. GDP growth has averaged a mere 2.1% annually since the country emerged from recession. There could be a silver lining in this, however, as the below-average recovery may have suppressed the development of excesses across the economy and financial markets, perhaps giving the economic cycle above-average room to run and other economies a chance to catch up.
The Fallacy of the “Trump Trade”
The media loves to focus on the “Trump trade” and whether it’s on or off at any given moment. Admittedly, this concept may have had some validity in the immediate aftermath of the November election, when we saw surges in U.S. domestically focused companies and sectors like small caps and financials. Since the beginning of 2017, however, the best performers in the U.S. stock market have been those with the greatest exposure to foreign earnings. Investors seem to have accepted that 1) the aggressive Trump legislative platform will not be a driver of near-term earnings or economic growth and 2) the global economy is gaining momentum.
Widely acknowledged at this point, even among the most ardent Trump supporters, is that the ambitious agenda that the new president brought to Washington, D.C., isn’t going to happen quickly. In fact, with 100 days in the books the Trump administration is still searching for a signature legislative win. A healthcare bill made it through the House, though its prospects in the Senate are uncertain. Tax reform has been slow to gather momentum, forcing its architects to manage expectations around its timing. As we write this, President Trump has directed his team to accelerate their efforts to construct a proposal that would slash the corporate tax rate to…